China, China, Everywhere; But Not A Drop Of QE To Drink

Tyler Durden's picture

With this evening's news that Japan and the USA are 'backing down' from a planned 'joint security drill' to recapture a remote 'uninhabited' island in Okinawa province (apparently amid concerns of backlash from Beijing); and chatter of the PBoC gauging demand for reverse repos (instead of flooding us with newly minted Yuan which everyone believes is just the remedy), it seems very clear who the world's super-power is (militarily and economically). Furthermore, as The Diplomat explains, multi-faceted challenges to the new leadership — possible economic stagnation, social unrest, elite disunity, and a revival of pro-democracy forces — will make it more distracted and less politically capable to maintain discipline on numerous actors now involved in China's foreign policy.  The effects of such accumulated internal woes, while not necessarily aggressive, are certain to be an erratic pattern of behavior that both worries and puzzles China's neighbors and the rest of the international community.

"Be careful what you wish for.  A weaker China could nevertheless
inflict serious damage to the world order."

On China's Political Transition (via Damien Ma's interview with Foreign Affairs Magazine):

 

Via Minxin Pei of The Diplomat: Sorry World, What Happens In Beijing, WON'T Stay In Beijing

One of the questions on the minds of most China watchers these days is how Beijing will behave externally when it faces a far more difficult internal environmentOf the well-recognized challenges China will encounter in the coming years are its deteriorating economic dynamism, a structure of decision-making with diffused power and uncertain authority, rising nationalism, growing demand for political reform, and widespread popular disenchantment with the status quo.

 

In totality, these internal difficulties will reduce the resources available to maintain and expand China's influence around the world, constrain the Chinese military's ability to accelerate its modernization, and make Chinese leaders more reluctant to assume greater international or regional responsibilities.  Most worryingly, erratic behavior driven by a mixture of lack of leadership experience and political security will most likely mark Beijing's foreign policy conduct in the coming years.

 

Given the high profile China has assumed in projecting its economic influence around the world, particularly in resource-rich developing countries, one might dismiss as fanciful the suggestion that looming economic hardships at home may severely limit Chinese capacity for establishing itself as an economic alternative to the West.  But a closer look at how China has been funding its investments in Africa, Central Asia, and Latin America would show that such investments are not only expensive, but also very risky.   The grants and concessionary loans China has made to various countries to gain their goodwill have totaled at least tens of billions of dollars (these are reported figures; nobody knows the real amount).  They were made when China enjoyed double-digit growth and had ample cash to throw around.

 

But as the Chinese economy decelerates and less money flows into Beijing's coffers, the Chinese government will obviously have less funds to sustain such economic and diplomatic offensives.  Politically, continuing a lavish foreign aid program when its own people are struggling will surely arouse fierce criticisms from the public.  Not too long ago, the Chinese Foreign Ministry was denounced bitterly when it was revealed that China donated safe school buses to Macedonia when its own schoolchildren have to ride in unsafe vehicles.

 

China's risky foray into developing countries will face another hurdle.  Most of the big-ticket projects China has supported in these countries are funded by loans from China's state-owned banks.  Based on previous experience, many of these projects are likely to fail.  As Chinese banks are themselves expected to struggle to deal with a wave of non-performing loans at home, the last thing they want to do is to keep funding these high-risk, low-return projects abroad.  So it is a foregone conclusion that a weaker China at home means a less influential China abroad.

 

Another obvious casualty is China's much-vaunted campaign to project its "soft power."  Internally called "dawaixuan" (big external propaganda), this campaign has led to a huge expansion of official Chinese media presence around the world.  Xinhua, for example, has launched its English-language television news service.  The nationalist tabloid, Global Times, has added an English edition.  The official China Daily has regularly placed high-priced full-page ads in The New York Times, The Wall Street Journal, and The Washington Post.  Judging by the worsening of Chinese image around the world, this campaign has been a flop.  When Beijing's propaganda chiefs get their new austerity budgets in a year or two, it is hard to imagine they will decide to throw good money after bad.

 

China's waning economic, cultural, and diplomatic influence caused by dwindling financial resources will not be the only victim of its internal difficulties.  The People's Liberation Army, which has enjoyed double-digit growth in its budget for nearly two decades, will probably have to fight harder for its share of a smaller pie.  The pace of Chinese military modernization could slow down.  To Chinese neighbors, this development will reduce their anxieties.  Washington, of course, might also breathe a sigh of relief.  However, such an outcome is by no means certain.  It is conceivable that the PLA may cite the American "pivot," and territorial disputes with Japan, the Philippines, and Vietnam, to push for more defense spending.  Should the PLA succeeds in making its case, it will have to pay a high price because the Chinese military will be competing with other equally powerful political interests, such as state-owned enterprises, the bureaucracy, and local governments, for dwindling budgetary outlays.

 

Some Western observers may welcome such mounting woes inside China since they will diminish Chinese influence and reduce the "China threat."  But be careful what you wish for.  A weaker China could nevertheless inflict serious damage to the world order.

 

One obvious casualty of China's internal weakness will be Beijing's reluctance to play a more constructive role in global and regional affairs.  Cynics might say that Chinese leaders, even when times were good, talked more than they actually delivered.  While some of such criticisms were true, a more objective assessment may show that Beijing has, on occasion, played a more positive role than it has received credit for, such as during the East Asian financial crisis in 1997-98 and in its push for regional free trade.  Even on the Korean Peninsula, it has made Pyongyang behave less belligerently since early 2011 (after failing to do so in 2010).

 

On Iran and Libya, China has also chosen not to be a spoiler.  On global climate talks, Beijing's evolving negotiating positions have also improved considerably.  However, even China's modest contributions to the world order could be at risk if its leaders, so distracted by domestic crises, decide not to make any contributions at all.

 

A piece of conventional wisdom about a weaker China is that it will be more belligerent because its leaders will have the incentives to divert domestic attention with appeals to nationalism and a more aggressive foreign policy. This is a simplistic understanding of how Beijing behaves.  To be sure, such temptations do exist, and one can expect China's new leaders, hobbled by inexperience and lack of political capital, to pander to nationalist sentiments.  But Chinese leaders are no fools.  Talking tough is one thing, but acting tough is another.   When we examine Chinese foreign policy behavior in the last sixty years, we will find that Beijing, for all its bombastic rhetoric, actually has picked its fights carefully.  Acutely aware of their own limited military capabilities, Chinese leaders have avoided getting into fights they would be sure to lose.

 

If we apply this insight to speculating about Chinese external conduct in the coming years, the only thing we are certain about is uncertainty.  The confidence derived from a strong economy and relative domestic stability will be gone, and so will be the self-imposed restraints on jingoistic rhetoric.  Multi-faceted challenges to the new leadership — possible economic stagnation, social unrest, elite disunity, and a revival of pro-democracy forces — will make it more distracted and less politically capable to maintain discipline on numerous actors now involved in China's foreign policy.  The effects of such accumulated internal woes, while not necessarily aggressive, are certain to be an erratic pattern of behavior that both worries and puzzles China's neighbors and the rest of the international community.